January 2020 Monthly CRS REPORT:  The Pattern of Interest Rates: Does it Signal an Impending Recession?

CRS Reports

“The past history of yield curve inversion and subsequent economic downturns suggest that a recession could be in the offing” – May 5, 2008 Report for Congress[1]


Was congress warned of a yield curve inversion and impending recession on May 5, 2008 when the Dow hit 13,000 points?  And did WikiLeaks publish the report on February 2, 2009 when the Dow was at 8,000 points?

Yes and Yes!  You can click on a WikiLeaks here: https://file.wikileaks.org/file/crs/RS22371.pdf

Or you can find it on the CRS Database: https://www.everycrsreport.com/reports/RS22371.html

I took the liberty to summarize the paper in a few quotes:

If a recession were to occur this time around, however, it would come as a surprise to the vast majority of forecasters…An inversion usually occurs as a result of a rising federal funds rate, which is consistent with a tightening of monetary policy… Federal Reserve reduces the supply of federal funds, pushing up the federal funds rate…inverted yield curve indicated a 90% chance of recession.

The May 5, 2008 report notes that yield curve inversion happened in each of the last six recessions, being 1969, 1973, 1980, 1981, 1990 and 2001.  It also says that “clearly there are circumstances under which the early identification of an impending downturn maybe be advantageous,” however it does not explicitly mention what these advantageous could be, except for a fiscal stimulus package.

At what point will the taxpaying public become aware that not all is well with the government?  In the case of the $100 million taxpayer funded CRS, what purpose does it serve if the information given to congress will never be made available to the public?  Considering that WikiLeaks published the report 10 months after it was originally provided to congress, it seems most likely that there was never going to be an initiative to inform the public of an impending market crash.

The current mainstream economic narrative shrouds the yield curve with mysteries such as yield curve inversion due to bond trader anticipation of a recession, investor risk analysis, and a variety of other theories that have never been proved.  Austrian economists understand that there is no mystery behind the yield curve; to the Austrian economist, it is Central Bank tightening of the money supply and increasing interest rates that cause short term rates to go up faster than long term rates thus causing yield curve inversion.  While the “crash” occurs typically after yield curve inversion, it is more succinct to describe what is occurring by summarizing the Fed induced boom/bust cycle as follows:

When the Fed increases the supply of money (this is called inflation), currency devalues, asset prices go up, interest rates usually go down, and investors are more prone to take on malinvestments such as share buy-backs; this is known as “the boom.”  Eventually the Fed will decide to “tighten,” citing economic factors of its choosing such as “cooling a hot market,” to reach its “target rate of inflation” or to arrive at the optimal money supply.  This decrease in the money supply causes rates increase, asset prices decrease and malinvesments are exposed; this is the known as “the bust.” 

The CRS Report correctly notes that it is the Fed “tightening” that pushes up the Funds rate that ultimately causes economic contractions.  However it erroneously explains this using Keynesian dogma, citing that a “reduced rate of national spending.”  The error in this reason becomes clear because the opposite would be that a nation can avoid a recession if it only spends more money.

Given the Fed’s latest several hundred billion dollar return to QE, someone must have been getting worried.     

The May 5, 2008 report proves to be both insightful and almost prophetic noting that “Congress is currently contemplating a fiscal stimulus package in an effort to forestall a recession.”  Congress got their wish when on October 3, 2008 George W. Bush signed the Emergency Economic Stabilization Act for $700 billion.  Could congress already be preparing for the next bailout package after the next round of QE finishes?


[1] Marc Labonte and Gail Makinen, “The Pattern of Interest Rates: Does it Signal an Impending Recession?,” last modified May 5, 2008, https://www.everycrsreport.com/reports/RS22371.html.

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